Good morning, ladies and gentlemen, and welcome to the Henry Schein Fourth Quarter 2020 Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today’s call, Carolynne Borders, Henry Schein’s Vice President of Investor Relations. Please go ahead, Carolynne.

Thank you, Regina, and my thanks to each of you for joining us to discuss Henry Schein's results for the 2020 fourth quarter and full year. With me on the call today are Stanley Bergman, Chairman of the Board and Chief Executive Officer of Henry Schein; and Steven Paladino, Executive Vice President and Chief Financial Officer. Before we begin, I would like to state that certain comments made during this call will include information that is forward-looking. As you know, risks and uncertainties involved in the company's business may affect the matters referred to in forward-looking statements. As a result, the company's performance may materially differ from those expressed in or indicated by such forward-looking statements. These forward-looking statements are qualified in their entirety by the cautionary statements contained in Henry Schein's filings with the Securities and Exchange Commission, including in the Risk Factors section of those filings. In addition, all comments about the markets we serve, including end-market growth rates and market share, are based upon the company's internal analysis and estimates. Our conference call remarks will include both GAAP and non-GAAP financial results. We believe the non-GAAP financial measures provide investors with useful supplemental information about the financial performance of our business, enable the comparison of financial results between periods, where certain items may vary independently of business performance and allow for greater transparency with respect to key metrics used by management in operating our business. These non-GAAP financial measures are presented solely for informational and comparative purposes and should not be regarded as a replacement for corresponding GAAP measures. Reconciliations between GAAP and non-GAAP measures can be found in the supplemental information section of our Investor Relations website and in Exhibit B of today's press release, which is available on the Investor Relations section of our website. The content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, February 17, 2021. Henry Schein undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call. Please limit yourself to a single question and a follow-up during Q&A, to allow as many listeners as possible to ask a question within the one hour we have allotted for this call. With that said, I would like to turn the call over to Stanley Bergman.

Good morning. Thank you, Carolynne. Thank you all for participating in today's call. Against the backdrop of the most challenging year in our history, due to the COVID pandemic, with unprecedented human toll and economic impact worldwide, we were successful in supporting practices that were initially open for emergency services and also assisting customers preparing to restore practices to increased operating capacity as restrictions eased. Henry Schein's unwavering focus on our customers, along with our resilience and agility, enabled us to deliver fourth quarter total sales growth of 18.6%, capping off record total sales for the second half of 2020, as our end markets have rebounded. Our teams are working tirelessly to execute against our plans. We recognize the commitment and sacrifice of Team Schein members globally and wish to sincerely thank the team for the continued commitment the team brings to Henry Schein each day. Dental patient traffic has remained at stable levels compared to the third quarter of 2020, even in countries experiencing more stringent lockdown rules with the exception of the U.K. To date, the overall recovery is continuing. Specifically in the United States, the latest survey data published by American Dental Association for U.S. shows that dental practices are at close to 80% of pre-COVID patient volumes. That's patient traffic. These patient volumes represent a slight increase over the past couple of months of ADA survey data, which we believe is reasonably accurate. Henry Schein's U.S. dental e-claims data also show that patients continue to return for a broad set of oral care procedures. We also believe overall patient volumes in Medical are still at relatively stable levels. In fact, we are pleased to report that for the second quarter in a row, our global medical business has achieved over $1 billion in quarterly sales. Over…

Okay. Thank you, Stanley, and good morning to everyone. As we begin, I'd like to point out that I will be discussing our results from continuing operations as reported on a GAAP basis and also on a non-GAAP basis. Our Q4 2020 and Q4 2019 non-GAAP results exclude certain items that are detailed in Exhibit B of today's press release and in the supplemental information section of our Investor Relations website. Please note that we have again included a corporate sales category for Q4 that represents sales to Covetrus under the transitional services agreements that has now expired just shy of 2 years since the completion of the spin-off of our Animal Health business to form Covetrus. We expect stranded costs related to the Animal Health spin-off to be in the $10 million to $12 million range for 2021. Turning now to our financial results. Total net sales for the quarter ended December 26, 2020, were $3.2 billion, reflecting growth of 18.6% compared with the prior year, with internally generated sales up 17.1% in local currencies, which was driven by sales of PPE, or Personal Protective Equipment, as well as COVID-related products. Details of sales performance are contained in Exhibit E of our earnings press release issued earlier today. On a GAAP basis, our operating margin for the fourth quarter of 2020 was 5.7%, representing a decrease of 164 basis points compared with the prior year. On a non-GAAP basis, our operating margin of 5.9% contracted by 146 basis points on a year-over-year basis. Again, a reconciliation of GAAP operating margin to non-GAAP operating margin can be found in the supplemental information page on the Investor Relations page of our website. Our operating margin was unfavorably impacted by significant inventory adjustments associated with PPE and COVID-related products, as well as…

Thank you very much, Steven. I'd like to take a few minutes to discuss our strategic planning process. We undertake a rolling formal planning initiative every 3 years, and we are currently in the midst of developing our 2022 to 2024 strategic plan, which we believe will help us focus on optimizing the long-term return on our investments and enable us to continue delivering value to our shareholders. We had deferred, of course, and I think the investors know this, our strategic planning process for 1 year as we focused on addressing the impact of COVID-19. Today, we'd like to offer a preview of our thinking around some key components of our strategic plan. First, a key element in our effort to grow closer to our customers is our One Shine initiative, which is a unified go-to-market approach that enables practitioners to work synergistically with Henry Schein's supply chain, equipment sales and service and other value-added services, allowing our customers to leverage the combined value that we offer through a single program. Specifically, One Schein provides customers with streamlined access to our comprehensive offering of, of course, national brand products, Henry Schein private label and proprietary specialty products and solutions, including surgical and orthodontic products. In addition, customers have access to services, pretty wide range, probably the largest, we believe, in the marketplaces that we serve, including software and other value-added services. Ultimately, One Schein enables customers to benefit from the ability to enrich patient treatment options and outcomes and simplify business operations in addition to the opportunity to drive practice profitability. So looking more closely at our Technology and Value-Added Services and dental specialty businesses, let me start with a discussion on our Technology and Value-Added Services business, which comprises approximately $500 million of revenue, about 5% of Henry…

[Operator Instructions] Our first question will come from the line of Jeff Johnson with Baird.

Thank you. Good morning, guys. Two questions, if I could, this morning. First, just, Steve, on 2021 guidance, I understand that you're not and you really never do, I guess, provide revenue guidance. I'd still be interested in hearing maybe how you're thinking about your core ex PPE and COVID product revenues in dental and medical. Do they get back to 2019 levels this year, or how to think about that? And given the additional PPE and COVID revenues in 2021 versus 2019, it seems like your 2021 EPS guidance. If I were to get down to that $3.51 level, your margins have to be down something like 60, 70 basis points versus 2019. Is that a fair ballpark to think to get down to that $3.51 level? Thanks.

Yes. Thanks for the question, Jeff. So again, I just want to make sure people understand that the guidance that we gave is the floor. We've debated, quite honestly, whether to give guidance or not this quarter. But leading up to the quarter with investor meetings, we were getting lots of questions on guidance, and we felt giving a floor was beneficial rather than giving nothing and having that total uncertainty out there. So please take it as the floor. The other point I want to make, before I directly answer your questions, Jeff, is that people seem to look at, as you are, the non-PPE core sales growth. And I think it's important to note that, if you look at North American dental consumables as an example, that growth was – I think it was 0.4%, excluding PPE products, but that's given patient traffic is down 80% – down 20% to 80%. And so that's, I think, a good number considering that. And the other thing that's important to note is that we believe that PPE and COVID-related products will continue to be strong going forward. It will represent really the new standard of care for practitioners. So I wouldn't look at those revenues as non-recurring. I would look at them as recurring. But given that, the growth in our sales, excluding PPE, to specifically answer your question, really is directly related to the continued improvement in the underlying market, having that patient traffic grow from 80% to a higher number. Given that we're not making predictions on that, it's hard really to specifically answer, but that's the correlation that we're looking for. Also, I would say that while we're not giving specific margin items, we did note at least a couple of things in the call that negatively impact margin. One is stranded costs that we did say will be $10 million to $12 million for the current year for 2021. And we – Stanley did describe our investments in G-E-P, or GEP, that's also included in that guidance. So I think as the year goes on, Jeff, we'll try to give even greater guidance, but we really felt that doing at least a floor for guidance was better than doing nothing.

Yes. Understood. And that's helpful, Steve. And maybe just as a quick follow-up. You guys haven't officially confirmed your return to supplying Heartland Dental at the start, I guess, of April at the start of 2Q. Our checks seem to suggest that is going to happen, though. So one, can you confirm that? And then two, as we think about the moving parts, I know you've supplied them even over the last few years with some consumables products, some technology products. There might be a change going on in the implant side of that relationship a bit. But as I put all that in the blender, do we think of Heartland adding maybe a couple hundred basis points to your North American dental revenue growth over the next three quarters, the end of the last three quarters of this year? Thanks.

Yes. So maybe I'll start and Stanley could jump in. So first, yes, we can confirm that we've won the Heartland contract. We typically don't provide don't provide details on customer activity, so that's why we didn't put out a press release, and we don't intend on putting out a press release. But in direct response to your question, we can confirm that we have won the award. There's a transition period, so we still haven't started shipping product to Heartland. It will be later in the quarter. But given, again, that we don't provide specific customer activity, I'm going to limit it to that, Stanley, unless you have any other commentary.

I think that is correct, Steven. We have had a relationship with Heartland for decades, ranging from supporting their software needs, practice management needs and other software applications that we provide. In addition, we do provide certain specialty products to Heartland. We have done that for a while. And we continue to expect to grow that relationship as well as, I might add, other relationships in the DSO space and in the medical world, on the IDN space. But we made decision some years back to not report every time we add a new account. I think this becomes very complex. And so the bottom line is, we do expect to continue to grow our business with large accounts in dental and medical.

Thank you.

Our next question will come from the line of Glen Santangelo with Guggenheim.

Yes. Thanks. Good morning. Thanks for taking my questions. Hey. I just want to follow up on the questions regarding the guidance. Stan, if I heard your comments, you pointed to the ADA survey suggesting that volumes in North America seem to be at 80% pre-pandemic levels, and I'm just trying to reconcile that to a consumable number that Steve just pointed out, was up 0.4%. I mean, just thinking about volumes being down 20% and your consumable numbers sort of being up, how do you sort of reconcile those two? And then, I'll ask my follow-up upfront. As we think about the $3.51 floor, is that just kind of assume no change in visit behavior? So if we continue to monitor these ADA surveys as kind of like a baseline, we're assuming no meaningful improvement from those levels in that $3.51? I guess, that also assumes that the elevated sort of medical sales continue, as you just suggested, Steve, to kind of -- is also embedded in that $3.51? Sorry. I know there was a lot there to unpack, but, yes, I'll leave it there.

The question you're asking is key, and I think we should provide some clarity. Sometimes it's hard to do good. And the bottom line is, the analyst estimates are all over the place. So what we decided to do was to provide a floor. That's by no means guidance in the traditional sense. We're not providing ranges, as Steven noted. It's a floor, number one. Number two is, we do expect the visits to physicians and to dentists to continue to grow. We do expect, therefore, that our consumable business will grow. We'll go back to 2019 levels and grow a little bit above that, too. The same with our specialties and, of course, our software and other value-added services. We do expect Henry Schein’s programs, in general, One Schein, the way in which our sales organization relates to our customers, all of that, to continue to perform well. Having said that, we are in the midst of a pandemic. And so it's hard to provide solid guidance in the sense that we offered in 2019 before -- and before. So we decided to give a floor, which we're pretty comfortable with. Actually, we're quite optimistic about the business. And if we just had a look at 2000 -- in the first quarter, and we had to stop things now, I would say we're very optimistic. Having said that, we can't tell where this pandemic is going to hit. No one can tell. And just like a year ago, we cautioned investors about the pandemic. We're doing the same now, although we're a little bit more confident today than we were in February and March of 2020. What we're saying is we're comfortable with the bottom -- with the floor of the guidance we've given. We just can't give ranges. And yes, we believe our consumable business, our equipment business, our software business, our specialty businesses, are all poised to do well. And if the music stopped today, we think we'd have a very good 2021. But again, we can't tell where this is heading. I must say, though, that as one goes to the east and then comes west, things are getting better. Our Asia businesses are pretty much back to normal, doing quite well, Asia Pacific. Europe is okay, except for the U.K., where, hopefully, the reimbursement of dentists will encourage reimbursement for dentists to see more patients again. And in the U.S., it's pretty stable, both in dental and medical and we're hopeful that the 80% will start going back to normal to the pre -- to the 2019 levels as the year goes by. But exactly in which quarter, it's very hard to tell. All I can say is we are and we continue to be very optimistic about our business and are very pleased with the performance so far this year.

Yeah. Let me just add one thing, Glen, on one of your questions. You asked, well, patient traffic is 80% and you're up 0.4% ex PPE, what's the reconciliation. And remember, its patient traffic that the ADA measures. It's not procedures. And we do believe that part of the reason why is that there's a higher acuity of procedures being done today than typically. So there's more tooth restorations. There's more implants. There's more, again, of the higher procedures that generally cause a higher level of consumable products. Things like trophies and general examinations as a percentage of the total procedures and these matters high. So, the type of procedure being done is helping us with that. And just to quickly add on one of your questions, we're really not assuming much market improvement in that floor guidance. Because, again, we would not know when to assume it, and there's still a lot of uncertainty on when it improves. So there is potential upside if the market improves quicker because we really don't have that in our guidance at this point.

Okay. Thanks for all the comments.

Okay.

Your next question comes from the line of Jon Block with Stifel.

Thanks guys. Good morning. Maybe I'll ask both mine upfront in the interest of time, sort of one for each of you. Steven, for the gross margin pressure of roughly 300 bps year-over-year, is there a way to think about what's attributable to inventory and adjustments and lower supplier rebates, because I think most of that, per your commentary, is unlikely to reoccur in full, if you would, in 2021. And Stanley for you, just some thoughts on dental equipment in 2021, it's always a volatile product line, but how do you see demand shaking out this year and know what about priorities or preferences from the dentists? In other words, what's their highest-demand equipment items considering the COVID backdrop?

Steve, do you want to go first?

Sure. So Jon, we haven't given specifics on the supplier rebates and the inventory adjustments, so we just don't feel it's appropriate to go there. But you're right in that a lot of that negative margin is not expected to reoccur in 2021. And supplier rebates are a little bit fuzzy now because setting targets in this environment is difficult. So we're trying to be conservative in our outlook with that, but the inventory adjustments I can't say that there'll be 0, but there'll be much more – much less than what we've seen in the last quarter or 2. So hopefully, that helps you.

Just to add on to what adjustments, we made a decision in April to respond to the government's request to move as we were part of the HHS, before that, the FEMA Task Force and we responded by literally emptying our warehouses and providing PPE to hospitals in hotspots. These are not our normal customers. I'm not talking about a lot of money in terms of sales, but we had to replenish this product at higher prices, including significant freight costs. We made a decision as a company to provide PPE products to our customers at a lower price as we could possibly do that. And so at the end of the day, we provided, I believe, great customer satisfaction while following through on the government's call, and I'm referring to the United States, for a request to empty our warehouses on PPE and send it to those areas, those hotspots that were the most challenged. This did have an impact on our 2020 margins for PPE and in general. But as Steven said, I think that is largely behind us, but I do believe that the history books will tell, we made the right decisions from a morality point of view, and we are a higher ambitions company and we've made the right decision from our customers' point of view, number one. Number two, on equipment. We had almost a perfect storm at the end of a 2020 in North America. This particular situation did not occur outside of North America, where we did experience good consumable, by the way and of course, equipment growth. In the United States, and I'm not referring to Canada now, but specifically relating to the United States, we do report our North America numbers, but in the United States for equipment, Dentsply Sirona…

Yes, back to the question. Thank you.

Our next question will come from the line of John Kreger with William Blair.

Hi. Thanks very much. Stan, maybe to go back to some of your strategic planning comments, can you just give us a sense about as you guys get more stability in the business and sort of look beyond COVID, where you're most interested in expanding? For example, any interest in sort of taking medical more aggressively beyond the US, maybe new technologies or new specialty brands. Just give us a sense about where you'd really like to expand in the next few years?

Sure. John, thank you. Very good question. Of course, we want to continue to grow our traditional distribution business globally. And that's dental, where we are in most of the developed world, and in some markets in developing world. The developing world is growing in that area in the oral care area. So we will expand our footprint. We will drive efficiency in that business and expect to increase our margins in general on the distribution side, both in Dental, as I noted now, internal, but also, we are expanding our medical business abroad. We did not focus on our international medical business until about a year ago, 18 months ago, because we had so much going on in the US, but we have taken our small medical business in Europe, added resources to it, and we'll be adding more resources to it in the future and expect, of course, the medical distribution business to go beyond the US and Europe, expanding in Canada, where it's very small today, and in other markets. At the same time, specialty products will be important for us in dental. We expect to continue to grow. We've done very well in implants. We've done very well in endodontics. And we have a very good foundation in orthodontics. We had a peculiar fourth quarter again, a perfect storm. We had a manufacturer exiting that market, and so we had to replace that – those products from elsewhere. And we had a move in our distribution center around the end of the year. That will all catch up. And so those are the areas we want to invest in, expanding our specialty platforms around the world. Of course, Henry Schein One is a huge opportunity for Henry Schein. We're investing in that area. We're very, very…

Very helpful. Thank you.

We have time for one last question. Our final question will come from the line of Jason Bednar with Piper Sandler.

Yeah. Good morning. Thanks for the questions. I want to touch on some of the stronger pieces from the quarter here to close things out, and I'll ask them both upfront. The international dental consumables core growth was really strong, Stanley, and you talked about that. But just wondering your confidence in this momentum persisting going forward and to what extent there's maybe some pent-up demand that's supporting some of this growth versus core growth being reflective of maybe rising demand in some of these international markets. And then just, pivoting also to medical and the COVID testing revenue, $270 million is a big number for the quarter, but curious how you're factoring in price adjustments that are expected from the manufacturers in this market and future testing volumes, just really how you're planning for these cross currents this year. Thank you.

There are two very good questions. Again, a lot of good questions on this call, I might add. So international, we continue to expect our international business to grow. Internal growth, of course, we will add some acquisition growth as we've done in the past. It's hard to predict a quarter. I think one has to look at a trend for several quarters. But over several quarters, I think we are quite confident that we will grow our consumable and equipment businesses outside of North America, including Canada as part of the U.S. So it's part of our North American numbers. So I think it's fair to say we expect to grow our global consumables and equipment business and, in particular, are very enthused about our international business. On the testing. So we had a shortage of, believe it or not, even with these good numbers, of test in the point-of-care quick test arena. We believe the testing is now -- there's more testing available to us. The DPAs, I wouldn't say, are being completely satisfied, but there's more product available for us than in the past. And I'm referring to COVID testing, but also other tests, flu tests, et cetera. So I think it's fair to say that the price of these tests will come down, because the larger machines that were used in the earlier stage will be replaced those tests. A large number of those tests will be replaced by snap test with a lower cost per test. Having said that, the demand for test is likely to grow, in our view, and in particular, they'll be more available for our channel, which is the office-based practitioner environment and the workplace health environment. So in general, we think with the opening up availability, the price coming down, but at the same time, the demand growing, we expect to have a good 2021 in test. Of course, there's no way we can talk about any specific numbers because we don't know exactly, but we've built in our plans a fair amount of PPE sales and of testing sales. So these are two growth areas for us. It will grow as compared to 2019. Thank you for that question. And thank you for all the questions.

I'll hand the conference back over to Mr. Bergman for any concluding remarks.

Yes. Thank you, operator. Thank you all. I'm sorry we went over today, but there was a lot in this call that we wanted to cover a lot of unusual situations. Bottom line is we're quite optimistic about the future. Of course, no one can predict exactly where the virus is heading, although I think it's fair to say, we will not go into a situation again where dental practices will be closed down and physician practices and ambulatory surgical centers will be closed down. If it gets worse, the virus, I think there'll be more precautions, but I can't see a total lockdown as occurred in the second quarter. Of course, as our investors know, we powered down significantly in the second quarter and powered up very quickly in the third quarter. This did cost us a lot. It certainly probably cost us a little bit of market share, but I think we've gained that back and some more. So overall, I would say, we did the right things in 2021 from a cash preservation point of view, taking care of our team as the number one priority, and of course, in parallel ensuring that our customers service needs were taken care off, while at the same time in particular ensuring that PPE was made available to our customers at reasonable prices, of course, the prices went up significantly. But we kept prices to a large extent within the range of what it cost us, rather than passing on unusual profits that we could have gained. And I think this will pay off in the long run with trust from our customers. And in the end, I think, well, Henry Schein has come out of this COVID period as a much stronger company in terms of brand recognition and appreciation of what full service does in the dental and medical market for our customers. So with that in mind, I have to say, we're pretty optimistic about the future, although we are in this pandemic environment. Our plans will be finalized. There's a wide array of opportunities. We are operating right now under interim refresh plan for on 2021. But by the end of this year, we will firm up the key areas of focus. And I think we will, in turn, do well for our investors. We feel very comfortable. I will end with this comment. This year is our 25th year as a public company. We've had EPS compounded annual growth at a rate of 12% and stock appreciation at a rate of 12% during this period. We are a company that provides stability, and we believe that we're in good markets with a great team. Thank you very much, everyone, for participating in this call today.

Ladies and gentlemen, that will conclude today's call. Thank you all for joining, and you may now disconnect.